A new generation of performance-based finance models, such as social-impact bonds, are earning widespread attention by effectively tying the funding of social programs to results. These tools are increasingly applied in the U.S. and other developed economies to help governments, foundations, and service providers ensure that every invested dollar goes toward achieving the best social outcomes.
Instiglio, winner of the 2012 Harvard Public Sector Innovation Award*, is now applying these funding models to programs that address poverty in the developing world. The founders observed that international development money often didn’t flow to the best programs, so they began designing a plan to deploy modern finance tools, such as performance-based contracts and impact bonds, in developing countries like India and Mexico.
An impact bond combines flexibility and constructive accountability. A private-sector investor provides upfront capital to a service provider, and receives a return from an outcome payer—either a government or a donor—when measurable results are achieved (according to an independent evaluator). By shifting focus from activity to impact, the service provider is given more freedom, and more incentive, to use upfront funds in whatever manner achieves the specified results.
In their first year at Harvard’s Innovation Lab, the Instiglio team evaluated several countries to determine where impact bonds were a good fit, and decided on Colombia as a pilot site. While this first endeavor did not ultimately result in an impact bond, it proved a valuable learning experience for identifying the programs and political environments best suited for performance-based funding. “When government is the outcome payer, we look for a high-placed political champion who will support the project,” said co-founder Michael Belinsky. “We also look for a government and procurement system that will write long-term contracts for outcomes that manifest over multiple years.” Finally, said Belinsky, the programs under consideration must have a quantifiable impact.
Instiglio went on to leverage such conditions in India, where they designed the world’s first development impact bond for international education. In Rajasthan (India’s largest state), the learning quality for girls in school is low, and 40 percent drop out before fifth grade. Instiglio identified a high-performing NGO and brokered an impact bond that expanded their educational services to 18,000 children. As girls’ test scores and school enrollment increase, the upfront investor will receive outcome payments.
Instiglio has also established initiatives in Mexico, Colombia, and Burkina Faso. Their projects aim to improve outcomes in domains like healthcare, education, workforce development, and other areas that can empower families to escape poverty. Belinsky said the team continues to adapt their finance tools to suit new environments. They also offer performance management services to providers to help them better understand, track, and manage their results. “We’re even approached by established providers who are not funded through impact bonds,” said Belinsky. “They seek our help creating a performance management system because they want to maximize their impact.”
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*The annual Public Sector Innovation Award, launched by Leadership for a Networked World, Harvard University, and Accenture, encourages Harvard students to apply their creative energy to help solve pressing public-sector challenges and to foster the next generation of government leaders. Each year’s winner receives $10,000 in grant funding, access to Harvard and Accenture thought leaders, and incubation space to develop their project proposal. Learn more and apply at http://tech.seas.harvard.edu/harvardi3/.
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